The Singapore dollar is emerging as a preferred currency for carry trades, thanks to its low borrowing costs and stable outlook. The Monetary Authority of Singapore (MAS) maintained its policy settings last week, reinforcing expectations of limited currency appreciation after earlier tightening. This has led to strong safe-haven inflows, driving down forward-implied yields and making the Singapore dollar an attractive funding option.
Strategists highlight the Singapore dollar’s appeal as a funding currency due to its negative carry and low volatility. Abbas Keshvani, Asia macro strategist at RBC Capital Markets, noted that Singapore’s FX implied yields are lower than most peers, with limited upside for the currency. In contrast, the Japanese yen, traditionally used for carry trades, faces rising borrowing costs due to Bank of Japan (BOJ) rate hikes, increasing the risk of further currency appreciation.
The divergence between the MAS and BOJ policies is clear. The BOJ raised rates by 25 basis points in September, with markets pricing an 80% chance of another hike by December. This has supported a 2.7% gain in the yen against the US dollar in the second half of the year, compared to a 1.3% rise in the Singapore dollar. The Singapore dollar’s three-month forward-implied yield stands at around 1.65%, among the cheapest funding currencies globally.
The Singapore dollar’s reduced volatility also lowers the risk of exchange-rate moves eroding carry trade gains. Three-month option-implied volatility for the dollar-Singapore dollar pair has dropped to 3.55%, the largest decline among Southeast Asian peers over the past year. Dwyfor Evans, head of Asia-Pacific macro strategy at State Street Markets, noted that Singapore’s low rates make it a viable funding currency for high-yielding assets elsewhere.